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Voievod Posted: Thu, Aug 7 2008 2:39 PM

Will some answer the Wikipedia page criticisms in Austrian Theory of the Business Cycle page?

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fsk replied on Fri, Aug 8 2008 11:43 AM


Will some answer the Wikipedia page criticisms in Austrian Theory of the Business Cycle page?


Critics of the theory point out it requires that investors exhibit a kind of irrationality – that they be regularly fooled into making unprofitable investments by temporarily low interest rates.

Mainstream economists also argue that the Austrian school's theory cannot explain many of the observed empirical regularities in business cycles. For instance, MIT professor Paul Krugman has argued the theory implies that consumption would increase during downturns and cannot explain the empirical observation that spending in all sectors of the economy fall during a recession. Others point out that economies have experienced less severe boom-bust cycles since central banks have tried to stabilize economies, rather than the more severe cycles predicted by the theory.

Do you mean that?

Interest rate manipulations prevent business owners from making rational economic decisions.  Let's use a specific example.  Suppose housing prices are rising at 20% per year when mortgage rates are 6% per year.  Therefore, you should borrow and purchase real estate.  When the inevitable crash occurs, housing prices drop 50% and you have all these insolvent mortgages.  Too many houses were built during the boom.  Houses can only be sold for a fraction of the previous value.

However, you don't know when the bust will occur.  If you borrow and buy at the start of the boom phase, you make huge profits.  Insiders always qualify for a bailout (FRE, FNM, JP Morgan Chase/Bear Stearns).  Individuals lose their homes.  If an individual speculates, they risk losing everything.  When insiders speculate and are wrong, they get a bailout.

Suppose you refuse to borrow.  In that case, your money in the bank loses its value by inflation, and goes to speculators.  You can't win by playing the game, and you can't win by refusing to play.  The only way to refuse to play is to boycott the Federal Reserve and income tax.

The most severe boom/bust cycle was the Great Depression, which was 100% caused by the Federal Reserve.  Some people say the current bust is as bad as the Great Depression in real terms.  People don't realize how bad things really are because money supply inflation is misreported as economic growth.  Currently, there is huge inflation to bail out banks, exactly as occurred in 1933-1941.

Business cycles are not a natural free market phenomenon.  They are 100% caused by restrictions on the market.

With a central bank, you're guaranteed to have a scientifically created recession every few years.  With industry dominated by large corporations, they have the size to withstand the bust or lobby the State for favors.

I have my own blog at FSK's Guide to Reality. Let me know if you like it.

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